A New Model of Venture Capital

Different Models of Investing in Startups
  • Quick and Inexpensive access to capital : this is always important for entrepreneurs and probably a reason why ICOs took off so fast. It was relatively quick compared to raising VC which could take a long time. However, marketing an ICO and administering a crowd funding with crypto currencies and its security and regulatory challenges is significantly higher.
  • Liquidity in early stage venture assets : this is important to any early stage venture backer, be it an angel investor or a VC fund or its Limited Partners. It is a big reason angel and seed investors struggle to make money after taking most of the early risk. And it is a big reason VC funds sometimes promote unsustainable spending to spike growth and valuation of startups that they can sell off or use to attract new investors who would buy them out.
  • Governance and reporting realities : reporting use of funds, revenues and having processes to ensure the startup stays its course is important and is something that is lacking in ICO funded ventures which make them risky.
Using tokens to raise funds and buy fractional ownership in startups that can be traded
  • Positions VC as an advisory product and removes selection bias : VC has long been seen as an asset product by investors. And that asset, barring select few funds, have not generated any sizeable returns. Positioning VC more as an advisory product where investors get to choose and invest in startups that are sourced and qualified by VC funds also removes selection bias that affect a large number of startups at any time.
  • Makes early stage investments tradeable and drives liquidity : this therefore also allows a larger number of investors to participate in VC and can potentially bring in a larger pool of funds for early stage investing. Retail fractional ownership of startups also removes biases and situations brought on by strong arm and shorting tactics of VC fund managers.
  • Removes stress created by fixed VC fund life terms : current 8–10 year VC fund life terms no longer fit the profile of startups that may take longer to create a new product, scale and establish a profitable business. This new model makes VC fund life terms obsolete. It also allows VC funds to issue participatory notes (tokens) from time to time based on demand that its sourced and qualified portfolio of startups generate.
  • Regulation and Taxation friendly : this VC model possibly fits current regulation in many countries. Funds themselves can be raised in jurisdictions that are friendly to token based fund raises. Asset management companies can possibly qualify as foreign portfolio investors, that are responsible for adherence to local KYC/AML norms, issue of offshore derivative instruments, and reporting transactions and financials. Dividends and Capital gains may possibly get taxed at the hands of derivative instrument (participatory note or token) holders.
  • Changes the VC reward structure and mechanism for better : fat fixed asset management fees that are not linked to any performance is the bane of the current VC model. The new model can afford many innovations in reward structure and mechanisms for VC fund managers. For example, a percentage of value of a token can be paid to the asset management company when it endorses a participatory note (token) and issues a derivative instrument to the investor. Similarly, transaction fees on traded instruments and advisory fee based products can also be created.

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Entrepreneur, Technologist, Explorer. Tweets@BorahKallol

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Kallol Borah

Kallol Borah

Entrepreneur, Technologist, Explorer. Tweets@BorahKallol

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